§ Statement of Purpose

The View from 1776 presents a framework to understand present-day issues from the viewpoint of the colonists who fought for American independence in 1776 and wrote the Constitution in 1787. Knowing and preserving those understandings, what might be called the unwritten constitution of our nation, is vital to preserving constitutional government. Without them, the bare words of the Constitution are just a Rorschach ink-blot that politicians, educators, and judges can interpret to mean anything they wish.

"We have no government armed with the power capable of contending with human passions, unbridled by morality and true religion. Our constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other." John Adams, to the Officers of the First Brigade, Third Division, Massachusetts Militia, October 11, 1798.

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Monday, January 21, 2013

Resurgent Inflation

As Milton Friedman opined (and Paul Volcker, the only Fed chairman ever to reduce inflation, agreed), inflation everywhere and always is a monetary phenomenon. It is not caused by greedy businessmen increasing prices, as politicians would have you believe whenever gasoline prices spike. Government itself, through deficit financing and creation of fiat money, is the guilty party when the overall purchasing power of the dollar falls.

Periodic price fluctuations in different goods and services is not inflation, but a result of changes, or expectation of changes, in supply and demand. Bad winters in Florida produce higher orange juice prices. Iranian threats to close the Straits of Hormuz, or shutdowns of refineries in this country for maintenance, cause price changes for petroleum in the futures markets. Last year’s dry summer, coupled with government mandates for increased ethanol production, pushed up corn prices. Such price increases will subside as supplies are increased or demand for them is reduced.

Inflation as a monetary phenomenon means that the amount of money is deliberately increased by governments, in our case the United States Treasury working through the Federal Reserve system, faster than the production of useful goods and services. Prices of whatever individuals or businesses purchase are pushed up, but at different rates in different sectors of the economy.

As far back as there are monetary records, rulers debased the precious metals content of the coinage and continually increased the amount of debased coinage in circulation to finance their collectivization of power without arousing the public with additional taxes. This coinage debasement was price inflation in the same pattern as today’s manufacture of trillions of dollars by the Fed out of thin air to purchase the Treasury’s debt.

Rulers in earlier centuries inflated the coinage to finance their wars. Our government debases the dollar to fund its ever-increasing deficit spending on the bloated welfare state. This is inflation, a hidden tax.

The Fed’s official goal of 2% inflation per year, even if monetary officials can hold CPI increase to that rate, will, over a normal working life of thirty five years, steal half the value of your income and savings. Your dollar income would have to double just to maintain your starting income’s purchasing power. Roughly half the value of your retirement savings, if you stashed it in a savings account, will have been confiscated by government-engineered inflation.

Worse, the Fed’s inflationary, easy money policies push business and consumer spending in uneconomic directions. Without the surge in creation of fiat money, there would have been no dot-com boom and bust, nor the unsustainable housing bubble that triggered our current recession.

After the end of World War I, the Federal Reserve first began its attempts to manipulate prices in the economy. From 1921 through 2005, the CPI increased 941%. What cost only a dollar in 1921 would on average cost roughly $1,000 today.

As noted in my recent post about so-called core inflation, price increases in consumer goods other than food and fuel have been more moderate than price increases that businesses must pay for everything from raw materials to machinery and equipment.

Federal Reserve officials look only at the core inflation numbers - consumer prices other than food and fuel - and tell us that there is no inflation, that their easy money, near-zero interest rate monetary policy will some day, years from now, get the economic pump re-primed and end our Great Recession.

What we have, in the real world, is the slowest economic recovery since Franklin Roosevelt’s New Deal imposition of socialism, along with rampant inflation in producers’ goods.

Only one of two conclusions is possible: Federal Reserve officials are clueless, or they are colluding with the Obama administration to steal the public’s wages and savings through deliberate inflation. The latter will increase Federal power, and further distort the Constitution’s balances of powers, by making everyone more dependent upon Washington, DC, as liberal-progressives continue implementing European-style, socialistic redistribution of wealth.